FAKE INVOICES AND GST FRAUDS (PART-1)

[Dr. Sanjiv Agarwal]

The tax reforms in indirect taxes in India by way of introduction of Goods and Services Tax (GST) w.e.f. 01.07.2017 is the most important and biggest reforms in taxes in independent India. With so many other advantages, it has made everything online - be it registration, payment of tax, filing of returns and other compliances. Not only this, GST has enabled the tax administration to trace and track tax evasion, fake transactions, mismatches and fraudulent practices by use of artificial intelligence and data analytics.

CBIC and GSTN have started detailed data analytics across a number of data sets available with them. The outcome of preliminary data analysis has revealed interesting insights such as:

• It has emerged that there is variance between the amounts of IGST & Compensation Cess paid by importers at Customs ports and input tax credit of the same claimed in GSTR-3B.
• There are major data gaps between self-declared liability in FORM GSTR-1 and FORM GSTR-3B.

The menace of fake or bogus invoices is so rampant in India these days that few cases get reported everyday from any part of the country. Since GST is a tax law which is implemented, complied with and administered online, it becomes relatively easier for the tax regulators to find out transactions outside the system - unrecorded transactions unverified transactions outside the system and broken links. The route of fake or bogus invoices is resorted to avoid payment of tax, evasion of tax, record bogus transactions, fraudulent availment of input tax credit, or even inflating incomes, turnover, expenditure or input in the business or circular trading.

Large number of GST fraud cases involving the use of fake invoices for wrong availment of input tax credit (ITC), which is further used to pay GST on outward supply have been detected since the rollout of GST by the Central GST authorities as well as State GST authorities. Whereas the mens rea for the use of such fake invoices appears to be fraudulent availment/encashment of Input Tax Credit (ITC), the unscrupulous entities engaged in this also defraud other authorities such as Banks by inflating turnovers, laundering of money etc.

What is invoice?

Section 2(66) of CGST Act, 2017 defines the meaning of tax invoice as follows:

(66)“Invoice” or “tax invoice” means the tax invoice referred to in section 31.

As per section 2(66) read with section 31of the CGST Act, 2017,invoice ‘tax invoice’ is required to be issued by a registered person showing description of goods and/or services, value, tax charged and other particulars at the time of supply. It is a document evidencing supply of goods and/or services which becomes the basis for charge of tax.

According to explanation provided under section 31 of the CGST Act, 2017 ‘tax invoice’ shall also include any revised invoice issued by the supplier in respect of a supply made earlier. Debit notes and credit notes are separately dealt with in section 34 of the Act.

Invoice or tax invoice is a document which provides evidence of existence of transaction of supply of goods and/or services. Tax invoice issued by the registered taxable person is an essential document to establish time of supply and for the recipient of goods and/or services to avail input tax credit. The matching of transactions of inwards and outward supplies is also done on the basis of tax invoice. It is mandatory for every registered person to issue a tax invoice in terms of section 31 read with Rule 46 of CGST Rules, 2017.

Issuance of tax invoice (Section 31)

As per section 31(1) of the CGST Act, 2017, a registered taxable person supplying taxable goods shall issue, before or at the time of supply, a tax invoice showing the description, quantity and value of goods, the tax charged thereon and other prescribed particulars.

Therefore, a registered taxable person supplying taxable goods shall issue a tax invoice-

(a)       before or at the time of supply,

(b)       tax invoice should show-

(i)        the description, quantity and value of goods,

(ii)       tax charged thereon, and

(iii)     other details.

A registered person can only issue a tax invoice before or at the time of supply of goods. Thus, determining the time of supply of goods is important.

What is fake invoice ?

Fake invoice refers to a ‘Non-compliant GST invoice’.

“Non-compliant GST invoice’ means any invoice which does not comply with the provisions of the CGST Act and Rules, 2017. Usually, ‘fake invoice’ refers to a non-compliant GST invoice of the following types:

1. Invoice without any ‘supply’
2. Invoice with a ‘Non-compliant’ supply.

The ‘Invoices’ that are usually treated as ‘fake’ are those wherein the GST invoices are raised by an entity without actual supply of goods or services or payment of GST. There are three ways in which such fake invoices could be misused in the GST regime.

1. Issue of invoices without supply of goods or services where payment of tax is made by way of Input Tax Credit which is not available to the issuer of invoice. In such cases, there is no receipt of goods or credit by the issuer of invoice. He merely issues invoices and shows payment of tax by non-existent input tax credit. This results in actual loss of revenue where the buyer of the invoice avails inadmissible credit which is used for payment of tax. There have also been instances where no GST has been paid even by input tax credit by the issuers of the fake invoice.

2. Issue of invoices by persons where the invoice is issued to one person and the goods are diverted to some other person. The person who purchases invoices may utilize the credit for payment of taxes at the time of export of goods and claim refund of the said tax paid, resulting in loss of revenue.

3. Routing of invoices through a series of shell companies/dummy companies and transfer of input tax credit from one company to another in a circular fashion to increase the turnover. In such cases, there is no supply of goods or services and thereby availment of credit based on such invoices gets hit by the provisions of Rule 16 of the CGST Act, 2017, which stipulates that the conditions that to avail credit, the buyer should have an invoice on which tax has been paid and he should have received the goods. In such cases, availment of credit without receipt of goods is inadmissible and utilization of such credit for actual regular supplies results in loss of revenue and financial accommodation. In such cases, unscrupulous traders are utilizing the GSTN System to create invoices, fake e-way bills showing movement of goods etc., to defraud the revenue and the banking system.

Motive behind fake invoices

Any business or trade, who use ‘fake invoice’ earn input tax credit which is illegal and hence are liable for punishment under CGST law.

There could be following possible objectives which encourage fraudsters to indulge in issuing and using fake invoices:

1. Evasion of GST on taxable output supplies by:

a) Availing undue Input Tax Credit (ITC)

b) Saving GST (cash) by payment of tax liability using undue Input Tax Credit (ITC)

c) Clandestine supply without invoices and without payment of taxes

2. Converting excess Input Tax Credit (ITC) into cash by:

a) Transferring of Input Tax Credit (ITC) to those who can utilize it

b) Shifting Input Tax Credit (ITC) from exempted supplies to taxable supplies\

c) Encashment of Input Tax Credit (ITC) by way of IGST refund or unutilized Input Tax Credit (ITC) refunds

3. Inflating turnover for the purpose of:

a) Availing higher Credit Limit/ Overdraft from Banks

b) Obtaining bank loans

c) Improving valuations for issue of capital or sale of stake

d) Obtaining contracts including Government contracts

4. Booking fake purchases for getting Income-tax benefits by:

a) Showing reduced profit margins and higher expenses

b) Avoiding payment of Income-tax by reducing net profit

5. Cash generation/ diversion of company funds
6. Laundering of money

Impact of fake invoices

The issuance of fake invoice results in fake trade which is illegal.

Preparing and trading ‘fake invoice’ is criminal activity; this crime is punishable under the law with maximum imprisonment of upto five years, in addition to recovery of illegal input tax credit with interest and penalty.

Infact, it is social menace; it is against economy, society and development. Illegal input tax credit earned using ‘fake invoice’ is a drain on the economy and affects the GST revenue collections. Evil forces use ‘fake invoice’ to generate ‘cash’ which is most likely to be used for nefarious crimes and to fuel social tension.

Following are the effects or outcome of an issuing, using and dealing with fake invoices:

1. It amounts to fraudulent and illegal activities.
2. It is counter-productive and works against the national and economic interest of the country.
3. It is a social evil
4. It results in tax avoidance and tax evasion
5. It attracts penal provisions under section 122 of CGST Act, 2017
6. It is a criminal and cognizable act liable for imprisonment under sections 69, 132 and other provisions of the Act
7. Loosing right to carry on business as a result of cancellation of registration.

(To be continued……)